Authors

Professor of Company Law and Corporate Governance, University of Bristol

Disclosure statement

Lorraine Talbot receives funding from the Leverhulme Trust.

Andrew Johnston and Charlotte Villiers do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

The result of the UK’s EU referendum vote was a shock to many. But as the dust settles, it is clear that the working poor who carried the Brexit vote did not recognise the prosperous economy promoted by the Remain campaign. After years of austerity and with no end in sight, they voted for change, any change.

Government policy towards businesses and the way they are governed bears much of the responsibility for this. For decades, politicians of all parties have supported the maximisation of shareholder value, despite its clear adverse social and environmental consequences.

They did not change this approach, even after the financial crisis. Instead of seeing the banks, their directors, their shareholders or their bondholders pay the price, the wider public bore the brunt of the crisis, in the form of cuts to public services and social security.

People then saw the government support business, while their working prospects diminished. Central banks cut interest rates to historically low levels in the name of stimulating the economy and encouraging investment. Numerous rounds of quantitative easing inflated asset prices (driving the price of a home further out of reach), in the hope that some of the gains would trickle down and benefit those without assets.

For large companies this was a great opportunity. Their response was not to invest and create jobs, however, but to borrow cheaply to resume their practice of returning capital to shareholders, through share repurchases and dividends. Their business models are geared towards increasing shareholder value. So shareholders and executives benefited from loose monetary policy, but the majority of employees did not.

And there is little sign of this changing in the wake of the Brexit vote. In a bid to stop businesses from leaving the UK, George Osborne, chancellor of the exchequer, has pledged to cut corporation tax further. This will surely rub salt in the wounds of those who have seen their tax support removed as a result of his deficit cutting agenda.

The aim of cutting corporate tax rates is to keep businesses investing in the UK. But studies have shown that the government spends more on subsidies, grants and corporate tax benefits than it takes from them in tax receipts.

Financial returns to shareholders in the form of dividends and share buybacks have consistently been prioritised over ensuring that the voting millions are paid the wages they require to live anything remotely resembling a prosperous life.

The vote for Brexit represents a clear rejection of these policies. So as the UK moves on from the vote, here are five simple reforms that could steer the UK towards a fairer and more sustainable economy.

1. Curtail the legal powers of shareholders

Currently, company law empowers shareholders to dictate how companies work, but imposes no fiduciary duties upon them to act in the best interests of the company.

Reforms are essential to protect the UK’s productive capacity by protecting and investing in assets. They should also help to ensure that workers are paid a fair wage by empowering unions and increasing their role in corporate decision-making.

2. Involve employees in takeover deals

At present, takeovers are viewed as a matter for shareholders alone, but they have significant impacts on everyone involved in a business. They often lead to redundancies, for example. The rules on takeovers must be reformed so that companies can fight off unwelcome bids and protect their productive assets.

3. Control speculative takeovers

Cheap and plentiful credit has allowed speculators to buy and liquidate business assets whose value exceeds the profit they can generate. Speculators borrow most of the money they need to purchase the shares of public companies and then they transfer the debts to the company. They then sell off the company’s assets, cut costs to pay back the debt, including putting labour out of work, so that they can pay themselves extravagant “exceptional” dividends. This process is helped by re-registering public companies as private, as Philip Green did with BHS.

These transactions should be prohibited, or allowed only in exceptional circumstances. The currently favourable tax treatment of the debt used for speculative takeovers should be reconsidered.

Asset stripped.Yui Mok / PA Archive

4. Make boards more accountable to employees

Boards operate without enough engagement with their employees and are geared towards promoting shareholder value. They need to become more diverse in terms of social background, and be subject to an effective, legally enforceable duty to act in the interests of employees.

This means scrapping or changing the UK’s corporate governance code, which is largely focused on promoting shareholder value and relies on ineffective non-executive directors. If we are to keep it, it should include a role for employees and their representatives.

5. Protect companies and their assets

It is too easy for speculative shareholders to extract value from a company for short-term gain and to destroy the business.

In most cases, corporate assets have been built up over time. There should therefore be rules against distributing them to short-term shareholders, most of whom never actually contributed any investment – or anything else – to the company. A business’s assets, after all, are built up through the efforts of generations of workers.

The shock of Brexit is an opportunity to make society fairer. This means reshaping the way that businesses are run to benefit not just their shareholders, but all employees and wider society.